Recent changes have strengthened a savings tool that was already gaining popularity with retirement plan consultants. Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) were originally created by Congress to help consumers save money tax free to pay for healthcare. In 2018, contribution limits were raised, increasing the utility of these little-known but powerful accounts.
Sounds Similar — But Very Different
While HSAs and FSAs share some similarities, they can serve very different purposes. Retirement plan consultants can help participants boost their retirement savings by showing them an often overlooked benefit to one of these types of accounts.
FSAs are employer sponsored and used to save for medical expenses that employees anticipate having during the year. HSAs are individual accounts that can be used for any purpose after age 65. Both allow money to be contributed pre-tax, and distributions are tax-free when used for qualified healthcare expenses. However, contributions to an FSA are tied to an employer and must be used during the calendar year in which the contributions are made. If the participant changes employers, he or she loses whatever balance remains in the FSA, and any balance left over at year's end is also forfeited. Some employer FSAs allow up to $500 to be rolled over, or they may have a 16-week grace period to use the previous year’s contributions, but employers aren’t required to allow either rollovers or a grace period. This makes FSAs a good way to save for predictable short-term health costs such as dental cleanings, contact lenses and routine exams. Participants can contribute up to $2,650 per year to an FSA.
HSA: FSA’s More Powerful Cousin
For those who qualify, an HSA can be a valuable addition to a retirement plan. To contribute to an HSA, employees must be covered by a High Deductible Health Plan (HDHP) with a deductible of at least $1,350 ($2,700 for a family).
Money held in an HSA can be invested and grows tax-free. When participants change employers, their HSA travels with them. Up to age 65, money used for qualified medical expenses can be withdrawn tax free. After 65, withdrawals for medical expenses remain tax free, but participants can also use the money for any purpose by paying tax on it as income as they would for an IRA.
In 2018 HSA contribution limits increased to $3,450 for individuals and $6,190 for couples. Those over age 55 can make an additional $1,000 "catch up" contribution.
For those already maxing out 401(k) or IRA contributions, an HSA can be a great way to stash some extra retirement cash from pre-tax earnings. It’s not surprising that retirement plan consultants are recommending HSAs — or that more than 18.2 million HSAs had been opened by the end of 2016.